Ford Faces Big Challenges in 2010

(Ford CEO Alan Mulally comments at Detroit Auto Show added in latest update.)

DETROIT ( TheStreet) -- It does not take a genius to see that Ford ( F) is engaged in a historic turnaround.

Investors pushed the stock up 335% in 2009. Last week, the automakers' December sales report prompted another round of enthusiastic reports from analysts. Already, shares are up about 15% in 2010, after closing at $12.11, up 42 cents, or 3.59% on Monday.

On Tuesday, CEO Alan Mulally reminded analysts at the Detroit Auto Show that Ford has said 2011 will be solidly profitable and that the company will provide 2010 guidance during its fourth quarter earnings call. Of course, the unavoidable question is whether Ford can retain share price momentum following a 335% increase

>>Pictures From the Auto Show

And it is not unreasonable to think analysts will react positively after hearing CEO Alan Mulally speak Tuesday at the Detroit Auto Show. And yet, the question is unavoidable: Can Ford keep it going after a 335% share-price increase?

Mulally says yes. Asked in a recent interview, "What happens when the music stops?" he responded: "The music never stops. World-class companies profitably grow. They go through cycles, but they profitably grow for the long term. We have turned the corner. We have increased market share. We have a product line that we continued to invest in during the worst of times. And now we are going to serve all those customers around the world. We are going to globalize our products, increase the quality and the productivity every year, forever."

Mulally took advantage of a historic catastrophe in the auto industry to reposition Ford as the clear leader among the Detroit Three. Having worked through a half-dozen business cycles during 38 years at Boeing ( BA), Mulally knows that the bottom is precisely the time when aggressive companies seize the initiative. "You take decisive action in a downturn," he said. "You accelerate the new products at the worst of times."

The automakers' December sales reports suggest that as the economy recovers, automakers will recover along with it. U.S. vehicle sales slumped to about 10.6 million in 2009, the lowest since 10.4 million in 1982. Sales are expected to reach 11.5 million to 12.5 million this year.

As they recover, Ford is gaining market share. Its 2009 share was about 15%, a full point higher than in 2008. Ford has improved its retail share 14 times in the past 15 months. So Ford is winning. But that does not necessarily mean Ford stock can surge continuously.

Early this month, with Ford trading around $10, Standard & Poor's analyst Efraim Levy downgraded the company to a sell. "I had a buy earlier in the year (2009)," he said. "In December, the stock went above my target price, and I downgraded it, thinking that on a valuation basis it had gotten ahead of itself. "

In the first quarter of 2009, Ford traded on bankruptcy fear, slumping as low as $1.50 and never seeing $3. Fear gripped the auto sector, not surprisingly given that two automakers and several suppliers sought bankruptcy court protection.

But for those who avoided bankruptcy, the rewards in terms of share price were high. In fact, compared to some suppliers, Ford was a laggard. TRW ( TRW) rose 552% and Tenneco ( TEN) rose 491%. "The sector was very strong as it rebounded from very depressed levels," Levy said.

In his January report, Levy noted that Ford faces intensifying competition, high fixed costs, high debt, continued weak (if improving) demand and the possibility that Chrysler and General Motors "could emerge healthier and as stronger competitors." Additionally, Levy questioned Ford's ability "to consistently bring successful vehicles to market," as well as the impact of the Ford's family's enhanced voting rights.

This is not to say that Levy is pessimistic about Ford, but rather that he has valuation concerns. "Relative to its domestic peers, Ford emerged stronger after the automotive depression," he said. "But it still faces challenges. A good benchmark is market share gain. Much of Ford's market share gain is from domestic competitors. If it can keep coming out with quality products and improve (customer) consideration more, things could change."

Ford is widely expected to pass GM as the leading U.S. automaker. What would truly underscore its success would be to capture significant market share from Toyota ( TM) and other Asian manufacturers. Two recent developments underscore that possibility, which could be the key to continuing stock price gains.

Last month, Ford reported that the projected resale value of its vehicles after 36 months in service increased by $1,310 for 2009 and 2010 models, more than any other full-line automaker. Ford already holds a residual value advantage over its Detroit competitors, and it has narrowed the gaps with Asian manufacturers. "The ultimate measure of the health of an automotive brand is its residuals," said Waldek Raczkowski, Ford residual business analyst, in a prepared statement.Yes, Ford employs a "residual business analyst."

Earlier, in October, Consumer Reports ranked Ford as equal to Toyota and Honda ( HMC) in terms of quality and reliability, for the second straight year.

"Never underestimate Consumer Reports and how important it is to the car buying public, particularly the baby boom generation," said analyst John Wolconowicz of IHS Global Insight. "It played a huge part in the rise of Toyota and Honda. But now, every day, Ford is becoming more and more acceptable to the white-collar crowd."

-- Written by Ted Reed in Charlotte, N.C. .

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